Many of us at some point in our lives will be faced with the prospect of deciding what we are going to live off when we retire. We all have a choice to make.
I would say to forget ISAs and Pensions but instead think of retirement income.
If you haven’t considered it carefully already then you should probably start doing so. Saving for retirement is an important a goal as any other I have ever come across in the world of investing.
But many people fail to really consider the first major choice they are faced with and tend to skip over it. Where will your retirement income come from?
Most people assume that saving for retirement is all about pensions. It’s not! Saving for retirement is about having an income source (or many) that will help you fund your ongoing expenses when you retire.
What that income source is, is entirely up to you. You can personalise it so much more than simply resorting to a pension.
Of course a pension is very tax efficient. It will pay tax relief on the money you put in to your pension. So if you put in £80 the government will put in £20 if you are a basic rate taxpayer.
However you are restricted by how and when you can access your money after that. You will pay tax on the income you withdraw from a pension and can only access it after you reach 55.
If you put money in to an ISA for example, although you would not receive any tax benefits on the way in, you will have full access to your money at any time during your life and can withdraw any level of income, tax free.
Of course some people buy property and live off the rental yield. Some people continue to work because they enjoy what they do. Some people sell their business and live off the proceeds. Then of course there are those people that do nothing, or think they are doing something by having a company pension and think they’ll be alright.
With the prospect of living for 40 years or more even after you reach the age of 60 then planning for your retirement is incredibly important.
I encourage all of my clients to enjoy their life and spend what they have worked hard to earn when they get to the position to be able to do that. But of course they can only do that because they have a plan in place that gives them the peace of mind of knowing they will be alright.